option final
TRANSCRIPT
-
8/8/2019 option final
1/21
-
8/8/2019 option final
2/21
Derivatives
A product whose value is derived from the valueof one or more underlying assets in a contractualmanner. The underlying asset can be equity, forex
commodity or any other asset.
-
8/8/2019 option final
3/21
Types
y Forwards
A forward contract is customized contract between two
entities, where settlement takes place on a specific date in the
future at todays pre-agreed price.y Futures
An agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Futures contacts are
special types of forward contracts in the contracts in the sense
that the former are standardized exchange-traded contracts.
-
8/8/2019 option final
4/21
Options
Options are of two types calls and puts.
Calls give the buyer the right but not the obligation
to buy a given quantity of the underlying asset, at a
given price on or before a given future date.
Puts give the buyer the right, but not obligation tosell a given quantity of the underlying asset at a given
price on or before a given date.
-
8/8/2019 option final
5/21
Options Terminology
y Option Seller - One who gives/writes the option. He has an obligation toperform, in case option buyer desires to exercise his option.
y Option Buyer - One who buys the option. He has the right to exercise theoption but no obligation.
y Call Option - Option to buy.
y PutOption - Option to sell.
y AmericanOption - An option which can be exercised anytime on or before theexpiry date.
y Strike Price/ Exercise Price - Price at which the option is to be exercised.
y Expiration Date - Date on which the option expires.
y European Option - An option which can be exercised only on expiry date.
y Exercise Date - Date on which the option gets exercised by the optionholder/buyer.
y Option Premium - The price paid by the option buyer to the option seller forgranting the option.
-
8/8/2019 option final
6/21
Call Option Put Option
Option Buyer
Buys the right tobuy the
underlying assetat the Strike
Price
Buys the right tosell the
underlying assetat the Strike
Price
Option Seller
Has theobligation to sellthe underlying
asset to theoption holder atthe Strike Price
Has theobligation to buy
the underlying
asset from theoption holder atthe Strike Price
-
8/8/2019 option final
7/21
Illustration on Call Option
An investor buys one European Call option on one
share of Suzlon at a premium of Rs.2 per share on 31
July. The strike price is Rs.60 and the contract matures
on 30 September.
It may be clear form the graph that even in the worst
case scenario, the investor would only lose a maximum of
Rs.2 per share which he/she had paid for the premium. The
upside to it has an unlimited profits opportunity.
On the other hand the seller of the call option has a payoff
chart completely reverse of the call options buyer. The
maximum loss that he can have is unlimited though a profit
of Rs.2 per share would be made on the premium paymentby the buyer.
-
8/8/2019 option final
8/21
-
8/8/2019 option final
9/21
Illustration on Put Options
An investor buys one European Put Option on
one share of Suzlon at a premium of Rs. 2 per
share on 31 July. The strike price is Rs.60 and the
contract matures on 30 September. The adjoininggraph shows the fluctuations of net profit with a
change in the spot price.
-
8/8/2019 option final
10/21
-
8/8/2019 option final
11/21
Operators in the Derivatives Market
Hedgers - Operators, who want to transfer arisk component of their portfolio.
Speculators -O
perators, who intentionallytake the risk from hedgers in pursuit of profit.
Arbitrageurs - Operators who operate in thedifferent markets simultaneously, in pursuit of
profit and eliminate mis-pricing.
-
8/8/2019 option final
12/21
Strategies
-
8/8/2019 option final
13/21
STRADDLELong Straddle
Buying a Straddle is simultaneous purchase of a CALL & PUT option
for a Stock, with same expiration date & Strike Price.
Why Straddle If you expect the stock to fluctuate wildly but unsure of
the direction. Enables investors to make profits on both upward and
downward fluctuation of stock. Potential gain can be unlimited
Abc ltd.
Spot Price = Rs. 250
Premium on Rs. 250 CA = Rs. 12
Premium on Rs. 250 PA = Rs. 12
BUY Rs. 250 CA and Rs. 250 PA
You Start making profits if Price goes above Rs. 274 or goes below Rs.
226
-
8/8/2019 option final
14/21
STRANGLE
Long Strangle
Buying a Strangle is simultaneous purchase of Out of Money CALL
& PUT option for a Stock, with same expiration date.
IPCL
Spot Price = Rs. 250
Premium on Rs. 270 CA = Rs. 5
Premium on Rs. 230 PA = Rs. 5
BUY Rs. 270 CA and Rs. 230 PATotal Premium Paid = Rs. 10
You Start making profits if Price goes above Rs. 280 or goes below
Rs. 220
-
8/8/2019 option final
15/21
SHORTSTRADDLE
WRITE CALL& PUTOPTIONS
If you expect the Stock to show very little volatility, it is worthwhile to write a call & put
option.
Ashok Leyland has been range bound for the last 3 months. You dont expect it to move
up or down too much.
Ashok Leyland Spot Price Rs. 25
Premium of Rs.25 CA Rs. 1.5
Premium on Rs.25 PA Rs. 1.5
Sell Rs.25 CA and Rs.25 PA.
Total Premium Received = Rs.3 .
Investor incurs a loss incase price drops below Rs. 22 or goes up above Rs. 28
Risky Strategy since profits limited but losses unlimited.
-
8/8/2019 option final
16/21
SELL OUT OF MONEY CALL & PUT OPTIONS
CESE Spot Price = Rs.270
Premium on Rs. 250 PA= Rs.5
Premium on Rs. 290 CA = Rs.4
Sell CESERs. 250 PA@ Rs.5 and sell Rs.290 CA@ Rs.4.
Total Premium Received = Rs. 9
You start incurring a loss if price goes above Rs. 299 or drops below Rs. 241
SHORTSTRANGLE
-
8/8/2019 option final
17/21
Call Option
Call Option Premium
1100 10 Out of the money
Cash price 1000 20 At the money
@1000 900 120 In the money
Intrinsic Value
Time Value
-
8/8/2019 option final
18/21
Put Option
Put Option Premium
Nifty 6100 200 In the Money
Cash price 6000 100 At the money
@6000 5900 50 Out of the money
Intrinsic Value
Time Value
-
8/8/2019 option final
19/21
Bull Spread
Nifty -6100 CE @+35
6000 +6000 CE @-68
-33
BEP 6033
Max Profit 67
Max Loss 33Cost of Creating Bull Spread 33
-
8/8/2019 option final
20/21
Bear Spread
Nifty +6000 PE @-142
5900 -5900 PE @+95
-47_
BEP 5953
Max Profit 53
Max Loss 47Cost of Creating Bear Spread 47
-
8/8/2019 option final
21/21
Covered Call Writing
+ Nifty Future @6000
- Nifty 6100 CE @+50_
+50_
BEP 5950
Max Profit 150
Max Loss Unlimited